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Financial Planning > Topic 2 : PRA & FCA > Flashcards

Topic 2 : PRA & FCA Flashcards

1
Q

What does PRA stand for?

A

Prudential Regulation Authority

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2
Q

What does FCA stand for?

A

Financial Conduct Authority

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3
Q

The PRA and FCA took over from what body?

When?

A

FSA - Financial Services Authority

April 2013

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4
Q

The PRA was originally a subsidiary of what organisation?

A

Bank of England’s PRA Board

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5
Q

When did the PRA cease to be a Bank of England subsidiary?

What is it’s status now?

A

1 March 2017

Prudential Regulation Committee replaced PRA board.

Brought into the legal entity of the Bank of England.

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6
Q

What is the PRA’s sole responsibility?

A

Day to day prudential supervision of banks and other systemically significant institutions.

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7
Q

With what is prudential supervision concerned?

A

The financial arrangements of a firm.

Particularly whether it’s financial affairs are arranged in such a way so as not to threaten the operation of the business.

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8
Q

What organisation looks at the economy to identify and address risks to economic stability?

A

The Bank of England’s Financial Policy Committee (FPC)

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9
Q

Who took over the consumer protection role from the FSA?

Who does it have responsibility for?

A

FCA

All retail & wholesale financial firms.

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10
Q

What is dual regulation?

A

Regulatory responsibility is shared by PRA and FCA.

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11
Q

List dual regulated types of firm.

6 items

A

Banks

Building Societies

Credit Unions

Insurers

Lloyd’s of London and it’s agents

Systemically important investment firms designated by the PRA.

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12
Q

Who is responsible for the Regulation of firms that aren’t Dual Registered?

A

FCA

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13
Q

What happens if FCA and PRA disagree.

A

PRA can veto FCA decisions that threaten financial stability or likely to cause failure of a PRA firm that could affect financial stability.

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14
Q

What were the factors that lead to increased regulation in financial services?

2 items

A

Increased focus on consumer rights.

Companies becoming ever larger focusing on profit over consumer protection.

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15
Q

Who must be authorised by the PRA and/or the FCA?

A

A firm carrying out regulated activities in relation to regulated investments in the UK

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16
Q

Where are regulated activities and regulated investments listed?

A

Financial Services and Markets Act 2000 and must be authorised by Regulated Activities Order. (RAO)

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17
Q

List the regulatory activities performed by firms defined by Financial Services and Markets Act

15 in 4 groups items

A

Accepting deposits
Insurance providers inc funeral plan

Dealing and arranging investments
Managing investments
Operating collective investment schemes
Advising on investments

Mortgage advisors
Insurance advisors

Cards and loans
Selling goods on credit
Offering goods for hire
Providing Debt counselling or debt adjustment services

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18
Q

The RAO defines regulated investments as …

9 items

A 
Deposits
E-money
Insurance contracts 
Stocks, shares, debentures, warrants
Gilts and local authority stock
Units in collective investment schemes
Rights under stakeholders pension schemes
Options and futures
Mortgage contracts
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19
Q

Regulated Investments

The FCA defines 2 categories of regulated investments. Name them. …

A

securities- shares, gilts etc

Contractually based investments - life policies, pensions, futures

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20
Q

PRA is responsible for the prudential regulation of who?

3 items

A

Deposit takers - banks, building societies, credit unions

Insurers

Major investment firms.

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21
Q

What does the PRA promote for impacted firms?

What is it trying to do?

A

Safety and Soundness

Seeking to minimise the risk of such businesses failing

And limiting the adverse effects on the stability of the financial system of a failure.

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22
Q

Should a firm fail or not be able to do business in its normal manner What does PRA seek to do?

A

Avoid harm resulting from disruption to the continuity of provision of financial services. Eg depositors can still access funds.

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23
Q

PRA’s expectations reflect the statutory threshold conditions firms are required to meet. What are they?

5 items

A

Hold an appropriate amount of quality liquid capital

Be able to measure, monitor and manage risk

Conduct business prudently

Be fit and proper

Be supervisable by the PRA was

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24
Q

What are the three key measures of prudential control?

A

Capital Adequacy - bank’s own funds
Liquidity - speed cash can be acquired
Solvency - the amount of a bank’s own funds (short term assets) in relation to its longer-term assets (such as customer loans)

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25
Q

Regulations about capital adequacy state deposit takers must have what?

A

Sufficient capital to make it very unlikely that deposits will be placed at risk.

Capital for this purpose is the firm’s own funds obtained from shareholders rather than deposited by customers).

Any losses made on lending should be born by shareholders rather than the depositors.

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26
Q

How are minimum requirements for capital adequacy specified?

Explain what that means.

A

A bank’s solvency ratio.

This means -

The Capital Required
—————————— (as a proportion of)
The bank’s total assets (ie mainly loans)

Allowances made for the perceived risk level of different assets.

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27
Q

How is the solvency ratio defined?

A

“Bank’s own funds as a percentage of the risk-adjusted value of the assets “

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28
Q

What is meant by “own funds”?

A

Funds raised by the shareholders / retained profits.

Not customer’s deposits.

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29
Q

As a result of Basel 3 what will happen to minimum capital requirements for banks?

2 items.

A

Reduce to 7% by 2019

But using a more exacting method of calculating solvency ratio.

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30
Q

What are EU Solvency Directives?

A

Key legislation in respect of the prudential supervision of insurance companies.

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31
Q

What did Solvency 1 do?

A

Focused on the capital adequacy of insurers and did not include requirements for risk management and governance of firms.

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32
Q

Solvency II

What are it’s aims?

What are the 3 pillars on which it rests?

A

Harmonise regulation of the EU insurance industry.

Aim : consistency across Europe

Pillar 1 - Capital requirements (how much must be held to reduce the risk of insolvency)

Pillar 2 - governance and risk management requirements

Pillar 3 - early disclose and transparency rules.

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33
Q

Why does Solvency II focus on an insurance firm’s capital requirements.

A

Reduce risk of insurance companies being unable to meet its claims

Reduce losses to policyholders if insurer can’t pay in full.

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34
Q

Solvency II: How is the capital requirement expressed?

A

Solvency Capital Requirement (SCR)

A basic SCR plus an allowance for operational risk less adjustments.

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35
Q

What is an ORSA

A

Own Risk and solvency assessment.

Insurers are required to complete this.

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36
Q

Define liquidity?

A

The ease and speed with which an asset can be turned into cash without significant loss of capital value.

In a banking context liquidity is a measure of a bank’s ability to acquire funds at a reasonable price in time to meet cash outflows.

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37
Q

Define Liquidity Risk

A

The risk that a firm, though solvent, does not have enough financial resources available to meet obligations as they fall due.

(Ie most of banks assets are in long term loans and lots of depositors withdraw at once)

Banks should seek to match the timing that assets and liabilities fall due.

38
Q

What are Asset Liquidity and Liability Liquidity?

A

Asset Liquidity - is achieved by selling assets for cash, reaching maturity, acting as security for borrowing.

Liability Liquidity- avoid concentration of liabilities - where a single factor can result in sudden significant claim. A wide spread of maturity dates for example.

39
Q

There is a new Senior Managers and Certification Regime from March 2017 for relevant firms.

What are relevant firms?

3 items

A

UK Based deposit takers

PRA designated investment firms

Uk branches of overseas firms.

40
Q

Senior Managers and Certification Regime extends to all financial services firms when?

A

2018

41
Q

FCA/PRA define senior management roles and functions that must be shared amongst the senior management team.

What must accompany an application for a senior role?

A

A Statement of Responsibilities detailing the aspects of the business they are responsible for.

The regulator can then compare the responsibilities with the qualities of the applicant.

42
Q

Who personally vets applicants for senior management roles?

A

FCA and PRA.

43
Q

Senior Managers and Certification Regime.

What must firms ensure?

2 items

A

When a senior manager moves role OR role changes significantly there must be a process to ensure a smooth transition to equip the manager for their new role

Each firm must maintain a responsibilities map - detailing How responsibilities are allocated across the senior management team.

44
Q

Senior Managers and Certification Regime

Describe the penalty element

A

FCA/ PRA instigate criminal proceedings against a senior manager whose (in)action has caused a business to fail.

Max 7 years in jail and / or an unlimited fine.

45
Q

What is the regime for junior employees.

4 items.

A

Those whose role can cause major damage to a business or its customers are subject to a certification scheme.

The firm must asses their fitness annually.

Subject to a code of conduct.

FCA/ PRA can take enforcement action against them personally for breaches of rules.

46
Q

Senior Managers and Certification Regime

What is the significant difference for insurance managers.

A

No scope for criminal proceedings.

47
Q

Whistleblowers are protected by what?

A

Public Interest Disclosure Act

Firms should have whistleblowing procedures .

48
Q

The oversight of an institution’s business can be carried out by …

A

Various groups or individuals-

Auditors
Trustees
Compliance

They ensure customer and shareholders investments are being handled safely.

49
Q

List the 8 fundamental rules of the PRA’s Regulatory regime

A

A firm must …

(Conduct its business with )integrity

(Conduct its business with)Skill, care and diligence

(Act in) Prudent manner

Maintain adequate financial resources

Have effective risk strategies and risk management systems

Organise and control its affairs responsibly and effectively

Deal with regulators in an open & cooperative way (inc timely disclosure to PRA)

Prepare for resolution - if resolution is needed it is done with the minimum disruption to critical services

50
Q

What are the three characteristics of the PRA’s supervisory approach.

A

Judgement based approach- do they meet the threshold conditions

A forward-looking approach- assessing current and future risks for in the economic environment.

A focused-approach- looking at issue which pose greatest risk.

51
Q

What is the FCA

A

Financial Conduct Authority

Independent limited company

Responsible for regulating the conduct of business of

  • retail financial services firms
    - wholesale market participants
52
Q

The FCA has three operational objectives. Name them …

A

Facilitate efficiency and choice in financial services market

Secure an appropriate degree of consumer protection

Protect and enhance the integrity of the uk financial system

53
Q

To whom is the FCA directly accountable? Under which act.

A

HM Treasury and Parliament

The Financial Services Act 2012

54
Q

What is the FCA’s statutory objective?

A

Ensuring relevant markets work well.

55
Q

What are the FCA’s three priorities for delivering good market conduct.

3 items

A

Enhance trust in wholesale conduct

Build Trust in the integrity of markets

Prevent market abuse

56
Q

How can the FCA achieve consumer protection -

3 items

A

Product governance and intervention. (Inc scrutiny of new products)

Ban misleading financial promotions

Publicising enforcement action

57
Q

Why does the FCA promote competitive markets?

A

To enable consumers to have access to a range of financial products on which they can make an informed choice.

58
Q

Regarding competition, the FCA wants to promote.

A

Competitive markets

Prices aligned with the costs of production and distribution

Innovation and development of new products

59
Q

What does the FCA have instead of rules?

Why?

A

Principles for Businesses.

It is impossible to make a rule fit every situation. So a general principle is made and the FCA seeks a culture where each firm finds its own way to achieve them.

60
Q

What are the 11 FCA Principles For Businesses.

A

Integrity
Skill, care and diligence
Management and control (ie have adequate risk systems)
Financial Prudence
Market Conduct
Customer’s interests first
Communications with clients - must be clear, fair and not misleading.
Conflicts of interest must be handled fairly
Customer’s’ relationship of trust - advice comes with a duty of care
Clients’ assets - firm must arrange protection for these when it is responsible for them.
Relations with regulators - open and cooperative with a duty to disclose.

61
Q

What are the three FCA criteria for Approved Persons.

A

Honesty Integrity and Reputation

Competence and capability

Financial soundness

62
Q

What will replace the Approved Persons Regime in 2018 ?

A

Senior Managers and Certification Regime.

SM&CR is aimed at individuals that perform functions that could lead to significant harm to a firm or its customers.

63
Q

What is the key change brought in by SM&CR?

A

Responsibility for vetting passes from regulator to firm.

They must establish an individual’s fitness and propriety at outset of employment and at least annually.

64
Q

Name two drawbacks of rules and regulations?

A

People make it their aim to comply with the letter of the law rather than the spirit.

Firms may hide behind the rules - using loopholes and technicalities to their advantage.

65
Q

What was establish to counter the drawbacks to a rules only approach.

A

FSA introduced Treating Customers Fairly (TCF) initiative in 2006.

It is now principle 6 of the FCA’s principles.

66
Q

TCF what does the FCA expect?

A

All firms must show consistently that fair treatment of customers is at the heart of their business.

67
Q

How does The FCA define fair.

A

It doesn’t.

It sees fairness as “flexible and dynamic” and it can “vary according to circumstances”.

Firms most decide what is fair treatment in the context of their business.

68
Q

The FCA intends TCF to apply at what times?

A

At every stage of the lifecycle of a product.

Eg

Product design
Sales and marketing
Administration
Post sale - like claims handling and complaints

69
Q

TCF responsibility lies with.

A

The firm’s senior management.

Who are required to ensure fair treatment is “built consistently into the operating model and culture of the firm”

70
Q

Under TCF what must information about financial products be to help customers understand what they are buying.

A

Clear about the services on offer

True about cost

Literature must be clear, fair, not misleading.

It must be possible to make a true comparison to the rest of the market.

71
Q

What 6 customer outcomes do the FCA use to define TCF

A

Consumers confident dealing with firms that are committed to TCF

Products are designed to meet properly identified customer’s needs.

Advice is suitable for the customer’s circumstances

Consumers get clear information at all stages - before, during and after a sale.

Products perform as expected.

No unreasonable barriers are placed to switching providers or making a claim or complaint.

72
Q

How do firms demonstrate they are consistently TCF

A

Management Information demonstrating the 6 consumer outcomes are being delivered

What action is being taken in areas where the business falls short.

73
Q

What is the supervisory role of The FCA?

What firms does it focus on?

A

Conduct supervisor to 56,000 firms.

Prudential supervisor for those firms not supervised by the PRA.

Focus on those firms whose failure would have greatest impact.

74
Q

How does the FCA approach the supervision of competition and markets?

A

Focuses on bigger issues in firms and across the industry.

Uses market intelligence (from firms, consumer groups and competition regulators).

Studies markets where intelligence is not functioning well.

75
Q

Types of Firm

FCA categorises firms according to their potential impact. The categories are …

2 items

A

Fixed portfolio firms

Flexible portfolio firms

76
Q

Describe fixed portfolio firms and how FCA supervises them?

A

Have large number of retail customers/ large level of client assets whose failure would pose a substantial risk.

They are allocated a named FCA supervisor who acts on a proactive basis.

77
Q

Describe flexible portfolio firms and how FCA supervises them?

A

The vast majority of firms

Supervised by mix of thematic market work and education programmes.

78
Q

FCA supervision is based on what 10 principles?

A
  1. Ensuring fair outcomes for consumers and markets
  2. Forward looking and preemptive
  3. Focus on big issues - concentrate resources where there is greatest risk
  4. Judgement based approach focusing on achieving the right outcomes.
  5. Ensuring act in the right spirit rather than simply following the letter of the law.
  6. Examine impact of business models and cultures on consumers
  7. Emphasis on individual accountability of senior management
  8. Act robustly when things go wrong
  9. Communicate openly between industry, firms and consumers
  10. Joined up communication.
79
Q

What two types of financial crime are the FCA particular committed to reducing?

A

Market Abuse

Money laundering

80
Q

Under EU Regulations Market Abuse is separated int what three aspects-

A

Insider dealing

Unlawful disclosure of inside information.

Market manipulation (ie giving false or misleading info to affect share prices). U

81
Q

Money laundering

Name some applicable laws.

A

Proceeds of Crime Act 2002
Terrorism Act 2000
Money Laundering Regulations 2012

82
Q

How do firms arrange their AML controls?

A

FCA gives forms flexibility to structure their own controls

According to the specific risks they face

Drawing guidance from the Joint Money Laundering Steering Group’s revised guidance notes.

83
Q

When were the Joint Money Laundering Steering Group’s revised guidance notes (4MLD) last updated?

A

2015

Changes come into effect June 2017.

84
Q

4MLD stands for?

A

4th Money Laundering Directive

85
Q

4MLD removed the right to apply for SDD for some customers.

What’s SDD?

Whe is it applied now?

A

Simplified Due Diligence

SDD is now only applied where the transaction presents a lower risk of Money Laundering occurring.

86
Q

How long must SDD be kept?

A

Firms must delete personal data after 5 years, extendable for a further five if retaining the data is deemed necessary for AML purposes.

87
Q

What must all EU states do in respect of beneficial ownership?

A

Maintain uptodate info on beneficial owners of companies.

88
Q

How long must KYC in PEPs be kept?

A

Until 18 months after they cease to be PEPs.

89
Q

What are the two types of investigation that the FCA is empowered to undertake?

A

General investigations

Specific investigations - if it has suspicions.

90
Q

The FCA’s investigator has what powers?

2 items, plus 1 action if necessary.

A

Demand that the person being investigated (and connections) answer questions or provide info.

Demand any person (connected to firm being investigated or not) provide documents.

The FCA can apply to a JP for a search warrant to get documents.

91
Q

What penalties are open to the FCA?

A

Variation of a firm’s permissions (ie ban them from a particular regulated activity)

Withdrawal of approval

Injunction - to prevent them from benefiting from misdeeds
U
Restitution - forfeit profit made from dodgy activity

Redress - losses to identifiable customers must be made good.

Disciplinary action

Enhanced supervision

92
Q

What disciplinary sanctions are available to the FCA for misconduct by individuals or firms?

A 
Private Warning
Publish a statement of misconduct 
Financial penalty
Order compensation 
Bring criminal prosecutions

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